What I'm Thinking and
Personal News and
More than six weeks into the new
year, the market continues to climb steadily higher. Amazingly, the
market is ignoring the troubles in the Middle East, dismissing the
severe lack of job growth in our economy and the desperate debts
weighing down our federal, state and local governments in this
country. So what is propelling the markets higher? Cash, low
interest rates and corporate profitability. The government has
created a party and we're all invited, that is until the bills have
to be paid. But for now, the bubbly is flowing so we can enjoy the
As I write this on an unseasonably
warm Thursday afternoon, the Dow Jones Industrial Average is trading
at a new two-year high of 12,315, 3.9% higher than it was five weeks
ago. In December I wrote about excessive optimism in the market,
which suggested that a correction might be forthcoming, Two months
later the Dow is still rising unabated, so watch out; the correction
will come, sooner or later. But when it comes, I believe it will
just be a pause that refreshes, setting the stage for a continued
So let's look at some charts and
see if they tell us anything. The daily chart of the Industrial
Average right now is exceedingly bullish. The market has gained
about 28% since the recent low set last June with only one brief 3%
correction (in November). RSI suggests the Dow is oversold and the
index is trading well above the trendline and the 50-day moving
average. After blowing right past 12,000, who knows what's next, but
beware the inevitable selloff.
Like the Industrial average, the
Transportation average has broken to new highs, re-confirming an
interim bull signal according to Dow Theory. The index is also
trading above both moving averages and the 50-day is much higher
than the 200-day average. All of this is bullish. The next
resistance level come in around 5,500 with strong support around
In the past two years, the yield
on the 10-year treasury went from 2% to 4%, then almost back to 2%
before rising to finish the year around 3.3%. The yield has now
risen above 3.6% and seems poised again to test resistance at 4%.
That means substantial potential losses for bond investors.
Remember, bonds are not riskless, as some believe; they are just
different than equities.
As always, I provide the following
chart to show the raw results for the preceding month, the
quarter-to-date and the year-to-date, not including dividends. As
you can see by the results below, the broad market averages began
the new year with solid gains. Interestingly, the only loser was
small cap growth as large cap stocks led the way. Not surprisingly,
bonds finished the month flat. Remember what I said last month: that
I expect the return on stocks to trump bonds by a wide margin this
Name of Index
Dow Jones Industrial
Europe, Australia, Far
- According to the Department of Labor, the figure for
seasonally-adjusted initial jobless claims for the week ended
February 121 was 410,000, an increase of 25,000 from the
prior week's revised figure. The four-week average
was 417,750, near the lowest figure since August 2008. The
numbers have been very choppy for the past few weeks, possibly
thanks to the bad weather throughout much of the country.
- Non-farm payroll employment increased by a meager 36,000 in
January, while another 40,000 were reported as added through
upward revisions to November and December. The majority of the
private sector jobs came in manufacturing, retail and durable
goods. Construction and transportation lost the most jobs. Average
hourly wages for blue collar workers were up to $19.34, and the
average work week inched down to 33.4 hours.
- The total number of workers counted as unemployed fell by
600,000 to 13.9 million (as people simply gave up looking and
partly due to a new statistical model). Therefore
the unemployment rate dropped to 9.0% (which shows just how
useless this number really is). The more comprehensive U-6 rate
jumped from 16.6% to 18.0%, or double the "stated" unemployment
rate!! 6.2 million people continued to be unemployed longer than
27 weeks. The seasonally adjusted number of people who could only
find part-time work dropped to 8.4 million and the number of
marginally attached workers ticked up to 2.6 million. The
number of people holding multiple jobs fell to 6.6 million.
Overall, the employment picture remains poor and somewhat
- The Congressional Budget Office (CBO) estimated that on a net
present value basis, the Treasury reported a federal budget
deficit of $53 billion in January, leaving us with a deficit of
$423 billion for the first four months of fiscal 2011, which is $7
billion less than the same period a year ago.
- The Census Bureau reported that the U.S. had a trade deficit
in goods and services of $40.6 billion in December, up from $38.3
billion in November. Exports rose nicely, but imports rose faster.
It is mildly worrisome that the trade gap appears to be growing
slowly and steadily after the economic crisis has abated.
- The Census Bureau reported that privately owned housing
starts were jumped 14.6% in January, after being flat in
December, but remained down 2.6% from a year ago, to a seasonally
adjusted annual rate of 596,000 units. The bad news is that all
the growth was in multi-family units; single family homes were
flat month over month. New building permits were down 10.4%
from the prior month and 10.7% from last year. Housing remains
- The National Association of Homebuilders/Wells Fargo
Confidence Index in February remained at 16 for the fourth
consecutive month. At least it isn't going down.
- The Census Bureau reported that on a seasonally adjusted
annualized basis, sales of new homes in December rose 17.5%
from the prior month, but remained 7.6% lower than a year ago, to
329,000 units. The estimate of homes for sale was 190,000, which
represents 6.9 months at the current rate of sales. The median
sales price was a higher $241,500, which is well above the rising
12-month moving average price of $220,483. Let's see if this can
be the start of some positive momentum.
- The National Association of Realtors reported that on a
seasonally adjusted annualized basis, sales of existing
homes rose 12.3% in December, but remained 2.9% lower than a
year ago, to 5.28 million units. The estimate of homes for sale,
at 3.56 million represents a declining 8.1 months of supply at the
current rate of sales. The median sales price dipped slightly to
$168,800, which is slightly lower than the 12-month average of
$172,483. The housing market is unlikely to get appreciably better
any time soon. This number does not jibe with the results from new
- The S&P/Case-Shiller Home Price Index (10-city index),
which uses a three-month moving average to track the value of home
prices across the US, fell again in November, and were weaker than
a year ago, giving further evidence of the trend of falling home
prices across the county. While this is a trailing indicator, it
does paint a bleak picture.
- According to RealtyTrac, the number of foreclosures in January
increased 1.4% from the prior month, after falling 1.8% in
December. The good news is that foreclosures were down 17% from a
year ago. The number of foreclosure filings is expected to
increase in 2011 once some of the litigation for "robo-signings"
and other clerical problems are addressed. This will continue to
be a big problem.
- The Institute for Supply Management (ISM) index of
manufacturing activity was 60.8 in January, up strongly from the
prior month. This marked the eighteenth consecutive month of
expansion in the manufacturing sector. The ISM index of
non-manufacturing activity was 59.4, also up strongly from the
prior month. This marked growth in the service sector for
thirteenth consecutive month. The "business" part of the economy
continues to grow, but people are still not getting hired in any
- The Federal Reserve reported that in January, capacity
utilization in the industrial sector was 76.1%, which leaves it
only 4.4% below the average level of the period from 1972 through
2008. Capacity utilization improved slowly but steadily over the
course of last year and appears primed to improve again this year.
- The Conference Board reported that it's index of Leading
Economic Indicators increased by only 0.1% in January, following
increases of 0.8% in December and 1.1% in November. Says Ataman
Ozyildirim, economist at The Conference Board: �With January�s
slight increase, following two large gains, the U.S. LEI is still
pointing to economic expansion in the coming months. Falling
housing permits and weakening labor market indicators were barely
offset by the continued positive contributions of the financial
components. The LEI remains on a rising trend, with its growth
rate picking up in recent months. However, current economic
conditions, as measured by the coincident economic index, while
improving slowly, remain weak.�
- According to the Bureau of Economic Analysis, the "advance"
estimate of GDP growth in the fourth quarter was an improved 3.2%,
which is higher than 2.6% rate of growth in Q3 and 1.7% in Q2. GDP
growth in Q1 was an artificially inflated 3.7%. The slight
increase this quarter was due in part to increased spending on
personal consumption and exports.
- The Federal Reserve reported that in December the amount of
outstanding consumer credit increased slightly from the prior
month, to $2.41 trillion. If consumer credit were to begin to
expand again after falling for much of the past four years, it
would be a boon to the economy.
- According to the Census Bureau, retail trade and food service
sales were 0.3% higher in January, and were 7.8% higher than a
year ago. The January increase was certainly muted by the horrible
weather. And while the past few months have shown some modest
improvements in retail sales, I continue to believe that until the
employment numbers show some sustained growth, retail sales will
continue to lag.
- The Federal Reserve reported in that in January the supply of
M-2 increased slightly from the prior month and was up 5.1% during
the prior six months. The supply of M-1, on the other hand, rose a
whopping 14.2% over the same six months. The appears to once again
be "priming the pump" to get the economy moving again, but
ultimately, we need to see if this money will circulate more
quickly in order to stimulate business growth.
- The Conference Board Consumer Confidence Index jumped in
December from 53.3 to 60.6, the highest level since May 2010.
Imagine how confident people would be if they had jobs. The index
is still well below a healthy reading. An overall reading above 90
indicates the economy is solid, and 100 or above indicates strong
- According to the BEA, the personal savings rate in December
dipped to 5.3% from 5.5% in November. I would expect the savings
rate to continue to trend lower from a high of 6.2% last June,
thanks to a rising stock market and historically low interest
rates on savings.
- According to the FDIC, 16 banks have failed so far this year,
through February 11. 160 banks failed in 2010, surpassing the
prior record of 140 banks that were either closed or merged into
healthier banks in 2009. By comparison, 26 failed in 2008 and only
3 failed in 2007.
Over the past two years, the
dollar has plunged and soared twice. Right now, the dollar index is
sitting in the middle of a new trading range forming in the lower
half of the larger bands. A generally weaker dollar tends to be good
for hard assets that price in dollars, and for the overall market.
Unrest in the Middle East could temporarily bolster the dollar, but
I believe our budget woes mean that the dollar is headed inevitably
As an investor, I have been riding
the golden bull market for eight years now. I have championed the
long term benefits from owning gold in virtually every issue of this
newsletter. And I see no reason to change my tune now. I've been
writing (and tweeting) that gold (and silver) prices have simply
taken a breather and corrected for a bit. Gold has traded between
$1,300 - $1,400/oz for the past five months, and may remain there a
while longer. But I'm confident that the price of gold will again
move north of $1,400 before falling below $1,300. Twice in the past
two years there was a period of six to seven months where the price
traded in a narrow range before bursting higher. We're now five
months into the latest consolidation. I hope none of you are short
gold right now.
While gold continues to get most
of the headlines, silver continues its somewhat stealth bull market.
After consolidating around $18/oz for most of 2010, the price of
silver exploded to a new high over $31/oz. The inevitable correction
brought the price down to around $26 before quickly turning around
and returning to $30. I was a bit early when I started taking a
position in some silver mining stocks a few years ago. I started
adding to those positions late in 2008 and others through all of
last year. Those decisions now are bearing fruit. I'm looking for
the price of silver to move higher this year.
The price of copper has soared
about 70% since the beginning of June 2010 and now sits at its all
time high price. Like all commodities, copper is benefiting from a
generally weak dollar and strong international demand (read: China).
Remember, Dr. Copper is often thought of as a proxy for economic
growth. So this chart is telling us that the prospects for future
growth look good. That being said, a pullback is inevitable, so
don't be surprised.
After trading between $70 - $85
per barrel for more than a year, the price of West Texas Crude rose
39% over the past seven months and reached a new period high of $93
before backing off to its current level of about $85. Interestingly,
the price of Brent Crude today (which covers Europe, Africa and the
Middle East, and represents about 2/3 of the world supply), is over
$103/barrel. This disconnect must close either by Brent falling or
West Texas rising; I'm betting on the latter.
It does appear that the financial
sector index has broken definitively above resistance, proving me
wrong in the process, as I've been a doubter since before Lehman
fell. I remain almost entirely uninvested in the financial sector
(my only holding being JPM) as I think problems remain thanks to
troubles in housing. But you can't ignore the trend, which is
decidedly bullish, at least for now.
The breakout in housing is not as
strong as with the financials, largely because the problems in
housing remain severe as the foreclosure crisis is far from over.
Therefore, I remain bearish. But again, technically, things look
Over the past two months, the
European stock market rose above powerful resistance, and a classic
"rising triangle" pattern, to move to the highest level since the
Crash of '08. The market seems to have discounted all the debt
problems among the members of the Euro Zone. The next resistance
levels come in at around $62 and $67.
This month, for the first time,
I'm going to show a chart of the emerging markets. Notwithstanding
the slight drop recently, thanks in large part I'm sure to the
unrest in the Middle East, this index is at it's highest level since
before the Lehman failure, and about 40% higher than last summer's
low. The emerging markets are where most of the GDP growth is in the
world right now, so we're going to pay more attention this year.
The health of the Chinese economy,
and by proxy, it's stock market, is very important to the world's
economy as they buy much of the world's output of raw materials and
produce most of the goods sold to the world. Given the robust
results from the US and Europe, you might think the Shanghai
Composite would also be hitting new highs, but that's clearly not
the case. The index is now trading around the middle of the range,
and between their narrowing 50- and 200-day moving averages. The
good news is that the index has turned up and is now trading above
both moving averages, which is bullish
Last month I told you that the
following chart was the most frightening of the month. The NYSE
Bullish Percent Index represents the percentage of stocks listed on
the NYSE that signal a buy. Contrarians would argue that extreme
levels of exuberance is a bearish indicator, and vice-versa. I was
concerned because of the huge over-abundance of optimism in the
market at the time, which suggested that a move to the downside was
forthcoming. Well, the best possible thing happened. Rather than a
big drop, we've simply had a slow drift up, allowing the RSI to fall
below oversold levels. There is still excessive enthusiasm, and a
period of consolidation would be welcome, but this chart doesn't
look quite as scary as last month.
Finally we have the VIX, or the
"Fear Index". As you can see, there is virtually no fear in the
market right now. Like the Bullish index above, too little fear is a
bad thing, which suggests sometime soon fear will return in
the form of a stock market correction, which is overdue anyway.
But who knows when that correction will come, for as John Maynard
Keynes once wrote: "markets can remain irrational far longer than
you or I can remain solvent." Should the Middle East devolve into
violence, the VIX could jump higher in a hurry.
What I'm Thinking
Last month I talked about
eliminating the "noise" from the market and simply looking at the
big picture. Right now, for the most part, that picture looks pretty
good for the stock market. We have an accommodative Federal Reserve,
stellar corporate profits, low interest rates and a lot of cash
sitting on the sidelines. The economy is clearly better than it was
a year ago, even if the employment situation remains problematic. As
I mentioned in my Fearless Forecasts last month, I'm cautiously
bullish for 2011, even as I acknowledge the strong likelihood of one
or two painful corrections sometime during the year.
At the end of 2010 I held about
$1.6M in cash across all of my accounts. Today our cash position has
dropped to just above $1.0M as I continue to put our money to work
in this bull market. I added to our precious metal holdings during
the recent correct and that investment has already generated solid
returns. My other recent acquisition was in the Rare Earth sector,
and that investment is up more than 10% already.
Going forward, I expect to
continue to make timely purchases and fill in existing positions for
all my clients.
Personal News and
The timing to move into my home
office couldn't have been better. I managed to survive all of the
snow storms without a minute of missed work. The only real change
has been my already very informal work attire has gotten even more
casual. My website has been updated, my new business cards and
stationary have been printed and all my mail has been forwarded. The
transition has been completely seamless and everything has worked
perfectly. The next step, which I hope will happen by the end of
March, will be the delivery and set up of my new office furniture.
Be it ever so humble, there's no place like home.
Sometime within the next few
months I hope to formally launch WAM's fan page on Facebook. I will
let all of you know as soon as it's up and running. I hope you will
all join me on the page and contribute to the content. For later in
the year, I'm planning a blog which will be integrated between my
website and Facebook. I would also urge all Twitter users to follow
me there as I tweet content daily about the economy and the stock
I'm making a commitment to getting
out and about more in 2011. So I'll be attending more industry
events, networking functions and meeting with other industry
professionals in order to expand my ability to more effectively
serve the growing needs of my clients. So if you are in the New York
area, and would like to meet, drop me a line and let's get together.
Or if you're aware of a great networking event, let me know and I'll
Don't forget that you can friend
me on Facebook, connect with me on
or follow me on Twitter.
I tweet the latest market and economic news every day.
Following me is a very easy way for you to receive stock market
updates in between my newsletters. I've been using these three sites
because I'm actively seeking to make new business connections as
well as maintain contact with friends old and new. So please look
for me out in Cyberspace, and ask your colleagues, friends and
family members to do the same.
As always, I thank you, my
readers, and remind you that this newsletter is for you. I have been
writing to you now for over seven years. I hope some of you have
learned something about our economy and our stock market, and that
you will continue to follow along with me into the future. If you
have any thoughts or suggestions on how to make it better, please
let me know. And if you'd like to speak with me about your
investment needs, I'd be pleased to be of service. Simply give me a
call or drop me an email.
"News and Views", Copyright, Werlinich Asset Management,
LLC and www.waminvest.com. All